Tricky 2014 for Indian Investors

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2014 is definitely a year to watch out for especially for those who have a kept a keen eye on Indian markets and have wondered the fate of the Indian Rupee.

Well, amidst all the economic mayhem, 2014 is also important politically.

Reason: it’s the election year. Economics has always been a hostage to many political gimmicks and unfulfilled promises by the party that comes into power. 2014 is, however, a bit different than any other election year held before. One big difference is that whichever party wins, will either bring very little change or will bring a lot of change. This is because India is going through an economic reform process. The central bank of India (Reserve Bank of India) has been making changes in repo rates in installments making interest rates fluctuate, something similar to what Federal Reserve did in 2008. Investors need to understand that the ‘ruling party’ or even a prediction to which party will form the government in 2014 will have an effect on the markets. This holds true not only for Indian investors but all those NRIswho are looking to invest in the Indian markets in 2014.

United Progressive Alliance (UPA) has long ruled over India but they have failed to follow that “with power comes great responsibility”. In the ruling years it did all that it could to ruin and then take corrective measures to revive the country. Of course, not all can be blamed on their policies since globally, nations were falling apart economically so the ripple effect also had a role. But having said that, UPA made it worse with their scams causing stocks to plummet. Investors gradually lost confidence in the party and it reflected in the markets. If this party comes back in power, the Indian economy looks dismal in 2014.Here is a look at some of the blunders in 2013:

• It made us believe that gold was a worthless metal by putting import curbs on it. On 23rd December 2013, RBI governor Raghuram Rajan says: Gold smuggling into India will pick up if the curbs continue. In reality there has not been much change in buying of gold or its prices except the usual fluctuations that anyways happen every year.

• With lowering of interest rates again and again, the growth got killed. As much as it confused them, it brought more confusion to investors at a time where they were losing faith in the government.

• To attract foreign inflows so as to correct its exchange rate, RBI has not made much change to the rupee fall. With the new governor, everyone had pinned up their hopes but rupee still struggles with a few points fallen since the declaration of the new governor.

• Food inflation still remains a question mark to a common man. The government failed to realize that the real problems are the overstocked warehouses and rotting grain dumps. India still does not have a fully integrated market for food grains, as there are some secret restrictions of movements of food grains.

Bottom line, UPA had all the tools to change the picture but they did not know how to use them or were too busy with scams!

In 2014, BJP led NDA seems to be the talk of the markets. Mr. Modi wishes or rather has this misconception that with the BJP government ruling India, things will change magically. The sad part is – it’s not true.

Investors are totally confused with what UPA has delivered to the markets and hence markets will surely behave positively with BJP forming the government. Now the biggest question is whether the rise in markets after government formation is due to the confusion or due to the expectation of the investor. The answer is simple: the latter- Expectation. Time and again expectations have played a great role in market reaction. The markets surged and the rupee appreciated sharply right after the state election results, unveiling the political stand of the investor community. The investor community in India is driven not by what is delivered or confusion but what is to be expected. The expectations are based on the promises made by the parties. Since UPA has not delivered what it promised, investors would want to put their trust in a party, which is currently promising more. Change is constant and every party goes through rise and fall of power. The question remains: how do investors remain safe? Is there an investment that can keep us safe and assure us returns that meet inflationary prices?
2014 will be a year that will witness many changes and whichever party comes into power will have to save the falling economy.
The answer as to how one should invest in 2014 is through diversification. Spreading your risks will keep you safe from any future surprises.

• Equity investment has loads of risk and investing a lot in it now will not be advisable. 20% is advisable for diversification. Look out for funds invested in IT industry since they’ll be doing well in 2014.

• Real Estate remains a big NO since there remains a gap between the given current prices and the huge affordability gap.

• With surprises in gold, take 10% off your income in this. Gold prices (as much as UPA thinks it to be useless) holds value especially on Indian occasions you always see a rise in the gold price from the previous year e.g. Dhanteras and Diwali.

• Bank Fixed deposit remain my favorite because you are safe from the market moves and its better to have a term deposit than just keeping your cash in savings account. 40% should go here. You will not lose anything and if you feel it is a lot, you can always break them in the middle since there is no penalty charge on premature withdrawal. The interest rate will always be higher than regular 4%.

• If you have rental income, get a recurring deposit and put some amount there so you know that part of your income is not lying idle or being used aimlessly.

• 30% is for bonds. Low returns for fixed duration but a safe bet in your portfolio.

2014 is not only the year for Indian political shift but also a global change. 2014 will see the entry of new Fed Chairman, Janet Yellen. The year will see the reaction of Abenomics, an effort by Japan’s Shinzo Abe to put an end to inflation by creation of special economic zones. Eurozone’s reforms could see more exits from Eurozone. Amidst all this will be China, doing something that will cause further uncertainty in the global markets. Therefore, these could give rise to fresh monetary bubble and impact Indian markets and common investors.

So staying sheltered by diversification will help in getting adequate returns while being both risky (gaining from markets when they rise) and safe (with debt instruments and fixed deposits).